Powerfleet, Inc 10-Q, filed May 10, 2022
Powerfleet, Inc. (AIOT)
About this 10-Q
Powerfleet, Inc filed this 10-Q on May 10, 2022, covering the quarter ended March 31, 2022.
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $33.16M
- up 14.4% from $28.99M a year earlier
- Net loss
- $2.93M
- compared with a net loss of $1.79M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction |
(I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller
reporting company |
| Emerging
growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes
☐
The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of the close of business on May 4, 2022, was .
INDEX
PowerFleet, Inc. and Subsidiaries
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
POWERFLEET, INC. AND SUBSIDIARIES
Condensed Balance Sheets
(In thousands, except per share data)
| December 31, 2021* | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventory, net | ||||||||
| Deferred costs - current | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Deferred costs - less current portion | ||||||||
| Fixed assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right of use asset | ||||||||
| Severance payable fund | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Short-term bank debt and current maturities of long-term debt | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue - current | ||||||||
| Lease liability - current | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Deferred revenue - less current portion | ||||||||
| Lease liability - less current portion | ||||||||
| Accrued severance payable | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (note 20) | - | |||||||
| MEZZANINE EQUITY | ||||||||
| Convertible redeemable preferred stock: Series A – shares authorized, $ par value; and shares issued and outstanding at December 31, 2021 and March 31, 2022 | ||||||||
| Preferred stock; authorized shares, $ par value; | - | - | ||||||
| Common stock; authorized shares, $ par value; and shares issued at December 31, 2021 and March 31, 2022, respectively; shares outstanding, and at December 31, 2021 and March 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive gain (loss) | ||||||||
| Treasury stock; and common shares at cost at December 31, 2021 and March 31, 2022, respectively | ( | ) | ( | ) | ||||
| Total PowerFleet, Inc. stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| * |
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
POWERFLEET, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Revenues: | ||||||||
| Products | $ | $ | ||||||
| Services | ||||||||
| Total revenues | ||||||||
| Cost of Revenues: | ||||||||
| Cost of products | ||||||||
| Cost of services | ||||||||
| Total cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total Operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Interest expense | ||||||||
| Other (expense) income, net | - | ( | ) | |||||
| Net loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit (expense) | ( | ) | ||||||
| Net loss before non-controlling interest | ( | ) | ( | ) | ||||
| Non-controlling interest | - | ( | ) | |||||
| Net loss | ( | ) | ( | ) | ||||
| Accretion of preferred stock | ( | ) | ( | ) | ||||
| Preferred stock dividend | ( | ) | ( | ) | ||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share attributable to common stockholders - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
POWERFLEET, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(In thousands, except per share data)
(Unaudited)
| 2021 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2022 | |||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total other comprehensive income (loss) | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
POWERFLEET, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(In thousands, except per share data)
(Unaudited)
| ` | Common Stock | Additional | Other | |||||||||||||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Treasury Stock | Non-controlling Interest | Stockholders’ Equity | |||||||||||||||||||||||||
| Balance at January 1, 2022 | | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | | $ | ||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||||||
| Issuance of restricted shares | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||
| Forfeiture of restricted shares | ( | ) | ( | ) | - | - | - | - | - | |||||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Shares issued pursuant to exercise of stock options | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Shares withheld pursuant to vesting of restricted stock | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Shares withheld pursuant to exercise of stock options | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common shares issued, net of issuance costs | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| ` | Common Stock | Additional | Other | |||||||||||||||||||||||||||||
| Number of Shares | Amount | Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Treasury Stock | Non-controlling Interest | Stockholders’ Equity | |||||||||||||||||||||||||
| Balance at January 1, 2021 | | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | | $ | |||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||
| Issuance of restricted shares | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||
| Forfeiture of restricted shares | ( | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
| Vesting of restricted stock units | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Shares issued pursuant to exercise of stock options | - | - | - | - | ||||||||||||||||||||||||||||
| Shares withheld pursuant to vesting of restricted stock | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Shares withheld pursuant to exercise of stock options | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common shares issued, net of issuance costs | - | - | - | - | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
POWERFLEET, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands, except per share data)
(Unaudited)
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash (used in) provided by operating activities: | ||||||||
| Non-controlling interest | - | |||||||
| Inventory reserve | ||||||||
| Stock based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Right-of-use assets, non-cash lease expense | ||||||||
| Bad debt expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Other non-cash items | ||||||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Deferred costs | ||||||||
| Deferred revenue | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash (used in) provided by investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from stock offering | - | |||||||
| Payment of preferred stock dividends | ( | ) | - | |||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Short-term bank debt, net | - | |||||||
| Proceeds from exercise of stock options, net | - | |||||||
| Purchase of treasury stock upon vesting of restricted stock | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash, beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | $ | $ | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash, end of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Taxes | ||||||||
| Interest | ||||||||
| Noncash investing and financing activities: | ||||||||
| Value of shares withheld pursuant to exercise of stock options | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
POWERFLEET, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2022
In thousands (except per share data)
NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Description of the Company
The Company is a global leader of Internet-of-Things (“IoT”) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.
I.D. Systems, Inc. (“I.D. Systems”) was incorporated in the State of Delaware in 1993. PowerFleet, Inc. was incorporated in the State of Delaware in February 2019 for the purpose of effectuating the transactions (the “Transactions”) pursuant to which the Company acquired Pointer Telocation Ltd. (“Pointer”) and commenced operations on October 3, 2019. Upon the closing of the Transactions, PowerFleet became the parent entity of I.D. Systems and Pointer.
Impact of COVID-19 and Supply Chain Disruptions
The ongoing COVID-19 pandemic, and mitigation efforts by governments to attempt to control its spread, has resulted in significant economic disruption and continues to adversely impact the broader global economy. The extent of the impact of the pandemic on our business and financial results will depend largely on the future developments that cannot be accurately predicted at this time, including the duration of the spread of the outbreak and COVID-19 variants, the extent and effectiveness of containment actions and vaccination campaigns, and the impact of these and other factors on capital and financial markets and the related impact on the financial circumstances of our employees, customers and suppliers.
In addition, the Company has experienced a significant impact to its supply chain given COVID-19 and the related global semiconductor chip shortage, including delays in supply chain deliveries, extended lead times and shortages of certain key components, some raw material cost increases and slowdowns at certain production facilities. As a result of these supply chain issues, the Company has had to increase its volume of inventory to ensure supply. During the three-month period ended March 31, 2022, the Company incurred supply chain constraint expenses which lowered its gross margins and decreased its profitability. The supply chain disruptions and the related global semiconductor chip shortage have delayed and may continue to delay the timing of some orders and expected deliveries of the Company’s products. If the impact of the supply chain disruptions are more severe than the Company expects, it could result in longer lead times, inventory supply challenges and further increased costs, all of which could result in the deterioration of the Company’s results, potentially for a longer period than currently anticipated.
As of the date of these unaudited consolidated financial statements, the full extent to which the COVID-19 pandemic and the related supply chain issues may materially impact the Company’s business, results of operations and financial condition is uncertain.
Basis of presentation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial position of the Company as of March 31, 2022, the consolidated results of its operations for the three-month periods ended March 31, 2021 and 2022, the consolidated change in stockholders’ equity for the three-month periods ended March 31, 2021 and 2022, and the consolidated cash flows for the three-month periods ended March 31, 2021 and 2022. The results of operations for the three-month period ended March 31, 2022 are not necessarily indicative of the operating results for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year then ended.
| 8 |
Liquidity
As
of March 31, 2022, the Company had cash (including restricted cash) and cash equivalents of $
In
addition, the Company’s subsidiaries, PowerFleet Israel Ltd. (“PowerFleet Israel”) and Pointer, are party to
a Credit Agreement (the “Credit Agreement”) with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim
provided PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $
On
February 1, 2021, the Company closed an underwritten public offering (the “Underwritten Public Offering”) of shares
of common stock (which included the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately
$
Because of the COVID-19 pandemic, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. During 2021 and 2022, we proactively took steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures.
The Company believes that its available working capital, anticipated level of future revenues, expected cash flows from operations and available borrowings under its revolving credit facility with Hapoalim will provide sufficient funds to cover capital requirements through at least May 10, 2023.
NOTE 2 – USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates estimates used in the preparation of the financial statements for reasonableness. The most significant estimates relate to realization of deferred tax assets, the impairment of intangible assets, and stock-based compensation costs. Actual results could differ from those estimates.
As of March 31, 2022, the impact of COVID-19 continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
NOTE 3 – CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances exceed Federal Deposit Insurance Corporation (FDIC) and other local jurisdictional limits. Restricted cash at December 31, 2021 and March 31, 2022 consists of cash held in escrow for purchases from a vendor.
| 9 |
NOTE 4 - REVENUE RECOGNITION
The Company and its subsidiaries generate revenue from sales of systems and products and from customer SaaS and hosting infrastructure fees. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrently with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s base warranties continue to be recognized as expense when the products are sold (see Note 12).
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. Product sales are recognized at a point in time when title transfers, when the products are shipped, or when control of the system is transferred to the customer, which usually is upon delivery of the system and when contractual performance obligations have been satisfied. For products which do not have stand-alone value to the customer separate from the SaaS services provided, the Company considers both hardware and SaaS services a bundled performance obligation. Under the applicable accounting guidance, all of the Company’s billings for equipment and the related cost for these systems are deferred, recorded, and classified as a current and long-term liability and a current and long-term asset, respectively. The deferred revenue and cost are recognized over the service contract life, ranging from one to five years, beginning at the time that a customer acknowledges acceptance of the equipment and service.
The Company recognizes revenue for remotely hosted SaaS agreements and post-contract maintenance and support agreements beyond our standard warranties over the life of the contract. Revenue is recognized ratably over the service periods and the cost of providing these services is expensed as incurred. Amounts invoiced to customers which are not recognized as revenue are classified as deferred revenue and classified as short-term or long-term based upon the terms of future services to be delivered. Deferred revenue also includes prepayment of extended maintenance, hosting and support contracts.
The Company earns other service revenues from installation services, training and technical support services which are short-term in nature and revenue for these services are recognized at the time of performance when the service is provided.
The Company also derives revenue from leasing arrangements. Such arrangements provide for monthly payments covering product or system sale, maintenance, support and interest. These arrangements meet the criteria to be accounted for as sales-type leases. Accordingly, an asset is established for the “sales-type lease receivable” at the present value of the expected lease payments and revenue is deferred and recognized over the service contract, as described above. Maintenance revenues and interest income are recognized monthly over the lease term.
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on observable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available. Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity specific factors.
The Company recognizes an asset for the incremental costs of obtaining the contract arising from the sales commissions to employees because the Company expects to recover those costs through future fees from the customers. The Company amortizes the asset over one to five years because the asset relates to the services transferred to the customer during the contract term of one to five years.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
The following table presents the Company’s revenues disaggregated by revenue source for the three-months ended March 31, 2021 and 2022:
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE SOURCE
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Products | $ | $ | ||||||
| Services | ||||||||
| Total revenue | $ | $ | ||||||
| 10 |
The balances of contract assets, and contract liabilities from contracts with customers are as follows as of December 31, 2021 and March 31, 2022:
SCHEDULE OF DEFERRED REVENUE
| December 31, 2021 | March 31, 2022 | |||||||
| (unaudited) | ||||||||
| Assets: | ||||||||
| Deferred contract costs | $ | $ | ||||||
| Deferred costs | $ | $ | ||||||
| Liabilities: | ||||||||
| Deferred revenue- services (1) | $ | $ | ||||||
| Deferred revenue - products (1) | ||||||||
| Deferred revenue | ||||||||
| Less: Deferred revenue and contract liabilities - current portion | ( | ) | ( | ) | ||||
| Deferred revenue and contract liabilities - less current portion | $ | $ | ||||||
| (1) |
NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Finance receivables, current | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Contract assets | ||||||||
| Other current assets | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
NOTE 6 - INVENTORY
Inventory,
which primarily consists of finished goods and components used in the Company’s products, is stated at the lower of cost or net
realizable value using the “moving average” cost method or the first-in first-out (FIFO) method. Inventory is shown net of
a valuation reserve of $
| 11 |
Inventories consist of the following:
SCHEDULE OF INVENTORIES
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Components | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods, net | ||||||||
| Inventory, net | $ | $ | ||||||
NOTE 7 - FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:
SCHEDULE OF FIXED ASSETS
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Installed products | $ | $ | ||||||
| Computer software | ||||||||
| Computer and electronic equipment | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Property, plant and equipment, gross | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
and amortization expense of fixed assets for the three-month periods ended March 31, 2021 and March 31, 2022 was $
| 12 |
NOTE 8 - INTANGIBLE ASSETS AND GOODWILL
The following table summarizes identifiable intangible assets of the Company as of December 31, 2021 and March 31, 2022:
SCHEDULE OF INTANGIBLE ASSETS
| March 31, 2022 (Unaudited) | Useful Lives (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Amortized: | ||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||||
| Trademark and tradename | ( | ) | ||||||||||||
| Patents | ( | ) | ||||||||||||
| Technology | ( | ) | ||||||||||||
| Favorable contract interest | ( | ) | ||||||||||||
| Covenant not to compete | ( | ) | ||||||||||||
| ( | ) | |||||||||||||
| Unamortized: | ||||||||||||||
| Customer List | - | |||||||||||||
| Trademark and tradename | - | |||||||||||||
| - | ||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||
| December 31, 2021 | Useful Lives (In Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Amortized: | ||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||||
| Trademark and tradename | ( | ) | ||||||||||||
| Patents | ( | ) | ||||||||||||
| Technology | ( | ) | ||||||||||||
| Favorable contract interest | ( | ) | ||||||||||||
| Covenant not to compete | ( | ) | ||||||||||||
| ( | ) | |||||||||||||
| Unamortized: | ||||||||||||||
| Customer List | - | |||||||||||||
| Trademark and tradename | - | |||||||||||||
| - | ||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||
At
March 31, 2022, the weighted-average amortization period for the intangible assets was
Amortization
expense for the three-month periods ended March 31, 2021 and March 31, 2022 was $
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS AMORTIZATION EXPENSE
| Year ending December 31: | ||||
| 2022 (remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Finite-Lived intangible assets | $ | |||
There have been no changes in the carrying amount of goodwill from January 1, 2021 to March 31, 2022.
For the three-month period ended March 31, 2022, the Company did not identify any indicators of impairment.
| 13 |
Stock Option Plans
The Company granted options to purchase shares of the Company’s common stock to certain executives. The options have an exercise price that range from $to $. The options will vest and become exercisable if the volume weighted average price of the Company’s common stock during a consecutive 60-day trading period (the “60 Day VWAP”) ranges between $and $. The Company valued the market-based performance stock option awards using a Monte Carlo simulation model using a daily price forecast over ten years until expiration utilizing Geometric Brownian Motion that considers a variety of factors including, but not limited to, the Company’s common stock price, risk-free rate (%), and expected stock price volatility (%) over the expected life of awards (). The weighted average fair value of options granted during the period was $.
[A] Stock options:
SCHEDULE OF STOCK OPTIONS ACTIVITY
| Options | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Terms | Aggregate Intrinsic Value | |||||||||||
| Outstanding at beginning of year | $ | |||||||||||||
| Granted | ||||||||||||||
| Exercised | ||||||||||||||
| Forfeited or expired | ||||||||||||||
| Outstanding at end of period | $ | years | $ | |||||||||||
| Exercisable at end of period | $ | - | $ | |||||||||||
The following table summarizes the activity relating to the Company’s stock options, excluding the market based stock options that were granted to certain executives, for the three-month period ended March 31, 2022:
| Options | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Terms | Aggregate Intrinsic Value | |||||||||||
| Outstanding at beginning of year | $ | |||||||||||||
| Granted | ||||||||||||||
| Exercised | ||||||||||||||
| Forfeited or expired | ( | ) | ||||||||||||
| Outstanding at end of period | $ | years | $ | |||||||||||
| Exercisable at end of period | $ | years | $ | |||||||||||
SCHEDULE OF FAIR VALUE STOCK OPTION ASSUMPTIONS
| 2021 | 2022 | |||||||
| March 31, | ||||||||
| 2021 | 2022 | |||||||
| Expected volatility | % | % | ||||||
| Expected life of options (in years) | ||||||||
| Risk free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Weighted-average fair value of options granted during year | $ | $ | ||||||
Expected volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on historical data with respect to employee exercise periods.
The Company recorded stock-based compensation expense of $and $for the three-month periods ended March 31, 2021 and March 31, 2022, respectively, in connection with awards made under the stock option plans.
The fair value of options vested during the three-month periods ended March 31, 2021 and 2022 was $and $, respectively. The total intrinsic value of options exercised during the three-month periods ended March 31, 2021 and 2022 was $and $, respectively.
| 14 |
As of March 31, 2022, there was approximately $of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans for the performance stock options that were granted to certain executives. That cost is expected to be recognized over a weighted-average period of years.
As of March 31, 2022, there was approximately $ of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans that exclude the performance stock options. That cost is expected to be recognized over a weighted average period of years.
The Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
[B] Restricted Stock Awards:
SCHEDULE OF NON-VESTED RESTRICTED STOCK ACTIVITY
| Number of Non-Vested Shares | Weighted-Average Grant Date Fair Value | |||||||
| Restricted stock, non-vested, beginning of year | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Restricted stock, non-vested, end of period | $ | |||||||
The Company recorded stock-based compensation expense of $and $, respectively, for the three-month periods ended March 31, 2021 and 2022, in connection with restricted stock grants. As of March 31, 2022, there was $of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of years.
[C] Restricted Stock Units:
SCHEDULE OF NON-VESTED RESTRICTED STOCK ACTIVITY
| Number of Restricted Stock Units | Weighted-Average Grant Date Fair Value | |||||||
| Restricted stock units, non-vested, beginning of year | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Restricted stock units, non-vested, end of period | $ | |||||||
The Company recorded stock-based compensation expense of $and $, respectively, for the three-month periods ended March 31, 2021 and 2022, in connection with the RSUs. As of March 31, 2022, there was $total unrecognized compensation cost related to non-vested RSUs. That cost is expected to be recognized over a weighted-average period of years.
| 15 |
SCHEDULE OF NET LOSS PER SHARE BASIC AND DILUTED
| 2021 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2022 | |||||||
| Basic and diluted loss per share | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Weighted-average common share outstanding - basic and diluted | ||||||||
| Net loss attributable to common stockholders - basic and diluted | $ | ( | ) | $ | ( | ) | ||
Basic loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options and the proceeds thereof were used to purchase outstanding common shares. Dilutive potential common shares include outstanding stock options, warrants and restricted stock and performance share awards. We include participating securities (unvested share-based payment awards and equivalents that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of earnings per share pursuant to the two-class method. Our participating securities consist solely of preferred stock, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. For the three-month periods ended March 31, 2021 and 2022, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options, conversion of preferred stock, and vesting of restricted stock and restricted stock units totaling and respectively, would have been anti-dilutive due to the loss.
NOTE 11 - SHORT-TERM BANK DEBT AND LONG-TERM DEBT
SCHEDULE OF LONG TERM DEBT
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Long term debt - less current maturities | $ | $ | ||||||
| 16 |
Long-term debt
In
connection with the Transactions, PowerFleet Israel incurred $
The
Credit Facilities will mature on the date that is five years from the Closing Date. The indicative interest rate provided for the Term
Facilities in the original Credit Agreement was approximately
On
August 23, 2021, PowerFleet Israel and Pointer (the “Borrowers”) entered into an amendment (the “Amendment”),
effective as of August 1, 2021, to the Credit Agreement with Hapoalim. The Amendment memorializes the agreements between the Borrowers
and Hapoalim regarding a reduction in the interest rates of the two Term Facilities. Pursuant to the Amendment, commencing as of November
12, 2020, the interest rate with respect to the Term A Facility was reduced to a fixed rate of
In
connection with the Credit Facilities, the Company incurred debt issuance costs of $
Scheduled maturities of the long-term debt as of March 31, 2022 are as follows:
SCHEDULE OF MATURITIES OF LONG TERM DEBT
| Year ending December 31: | ||||
| April - December 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Long term debt | ||||
| Less: Current Portion | ||||
| Total | $ | |||
The Term B Facility is not subject to amortization over the life of the loan and instead the original principal amount is due in one installment on the fifth anniversary of the date of the consummation of the Transactions.
| 17 |
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued warranty | ||||||||
| Accrued compensation | ||||||||
| Government authorities | ||||||||
| Other current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
The following table summarizes warranty activity for the three-month periods ended March 31, 2021 and 2022:
SCHEDULE OF PRODUCT WARRANTY LIABILITY
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Accrued warranty reserve, beginning of year | $ | $ | ||||||
| Accrual for product warranties issued | ||||||||
| Product replacements and other warranty expenditures | ( | ) | ( | ) | ||||
| Expiration of warranties | ( | ) | ( | ) | ||||
| Accrued warranty reserve, end of period (a) | $ | $ | ||||||
| (a) |
NOTE 13 - STOCKHOLDERS’ EQUITY
[A] Public Offering:
On
February 1, 2021, the Company closed an underwritten public offering of shares of common stock (which included the full exercise
of the underwriters’ over-allotment option) for gross proceeds of approximately $
| 18 |
[B] Redeemable preferred stock
The Company is authorized to issue shares of preferred stock, par value $per share of which shares are designated Series A Convertible Preferred Stock (“Series A Preferred Stock”) and shares are undesignated.
Series A Preferred Stock
In connection with the completion of the Transactions, on October 3, 2019, the Company issued shares of Series A Preferred Stock to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors”). For the three-month periods ended March 31, 2021 and March 31, 2022, the Company issued -- and additional shares of Series A Preferred Stock.
Liquidation
Dividends
Holders
of Series A Preferred Stock are entitled to receive cumulative dividends at a minimum rate of
Voting; Consent Rights
The
holders of Series A Preferred Stock will be given notice by the Company of any meeting of stockholders or action to be taken by written
consent in lieu of a meeting of stockholders as to which the holders of common stock are given notice at the same time as provided in,
and in accordance with, the Company’s Amended and Restated Bylaws. Except as required by applicable law or as otherwise specifically
set forth in the Charter, the holders of Series A Preferred Stock are not entitled to vote on any matter presented to the Company’s
stockholders unless and until any holder of Series A Preferred Stock provides written notification to the Company that such holder is
electing, on behalf of all holders of Series A Preferred Stock, to activate their voting rights and in doing so rendering the Series
A Preferred Stock voting capital stock of the Company (such notice, a “Series A Voting Activation Notice”).
| 19 |
Redemption
At
any time, each holder of Series A Preferred Stock may elect to convert each share of such holder’s then-outstanding Series A Preferred
Stock into the number of shares of the Company’s common stock equal to the quotient of (x) the Series A Issue Price, plus any accrued
and unpaid dividends, divided by (y) the Series A Conversion Price in effect at the time of conversion. The Series A Conversion Price
is initially equal to $
Further, at any time (i) after the 66-month anniversary of the Original Issuance Date, (ii) following delivery of a mandatory conversion notice by us, or (iii) upon a deemed liquidation event, subject to Delaware law governing distributions to stockholders, the holders of the Series A Preferred Stock may elect to require us to redeem all or any portion of the outstanding shares of Series A Preferred Stock for an amount per share equal to the Redemption Price.
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income (loss) includes net loss and foreign currency translation gains and losses.
The accumulated balances for each classification of other comprehensive loss for the three-month period ended March 31, 2022 are as follows:
SCHEDULE OF ACCUMULATED OTHER COMPREHENSIVE LOSS
| Foreign currency translation adjustment | Accumulated other comprehensive income/(loss) | |||||||
| Balance at January 1, 2022 | $ | $ | ||||||
| Net current period change | ||||||||
| Balance at March 31, 2022 | $ | $ | ||||||
The accumulated balances for each classification of other comprehensive loss for the three-month period ended March 31, 2021 are as follows:
| Foreign currency translation adjustment | Accumulated other comprehensive income/(loss) | |||||||
| Balance at January 1, 2021 | $ | $ | ||||||
| Net current period change | ( | ) | ( | ) | ||||
| Balance at March 31, 2021 | $ | ( | ) | $ | ( | ) | ||
The
Company’s reporting currency is the U.S. dollar (USD). For businesses where the majority of the revenues are generated in
USD or linked to the USD and a substantial portion of the costs are incurred in USD, the Company’s management believes that the
USD is the primary currency of the economic environment and thus their functional currency. Due to the fact that Argentina has been determined
to be highly inflationary, the financial statements of our subsidiary in Argentina have been remeasured as if its functional currency
was the USD. The Company also has foreign operations where the functional currency is the local currency. For these operations, assets
and liabilities are translated using the end-of-period exchange rates and revenues, expenses and cash flows are translated using average
rates of exchange for the period. Equity is translated at the rate of exchange at the date of the equity transaction. Translation adjustments
are recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Net translation gains/(losses)
from the translation of foreign currency financial statements of $
| 20 |
Foreign
currency translation gains and losses related to operational expenses denominated in a currency other than the functional currency are
included in determining net income or loss. Foreign currency translation (losses) gains for the three-month periods ended March 31, 2021
and 2022 of $
NOTE 15 – SEGMENT INFORMATION
The Company operates in one reportable segment, wireless IoT asset management. The following table summarizes revenues by geographic region.
SCHEDULE OF REVENUES AND LONG LIVED ASSETS BY GEOGRAPHICAL REGION
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| United States | $ | $ | ||||||
| Israel | ||||||||
| Other | ||||||||
| Total revenues | $ | $ | ||||||
| December 31, 2021 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Long lived assets by geographic region: | ||||||||
| United States | $ | $ | ||||||
| Israel | ||||||||
| Other | ||||||||
| Long lived assets | $ | $ | ||||||
NOTE 16 - INCOME TAXES
The Company records its interim tax provision based upon a projection of the Company’s annual effective tax rate (“AETR”). This AETR is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. The Company updates the AETR on a quarterly basis as the pre-tax income projections are revised and tax laws are enacted. The effective tax rate (“ETR”) each period is impacted by a number of factors, including the relative mix of domestic and foreign earnings and adjustments to recorded valuation allowances. The currently forecasted ETR may vary from the actual year-end due to the changes in these factors.
SCHEDULE OF INCOME BEFORE INCOME TAX DOMESTIC AND FOREIGN
| 2021 | 2022 | |||||||
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Domestic pre-tax book income/(loss) | $ | ( | ) | $ | ( | ) | ||
| Foreign pre-tax book income/(loss) | ( | ) | ||||||
| Total income before income (loss) taxes | ( | ) | ( | ) | ||||
| Income tax benefit (expense) | ( | ) | ||||||
| Total income (loss) after taxes | $ | ( | ) | $ | ( | ) | ||
| Effective tax rate | ( | %) | % | |||||
For the three-month periods ended March 31, 2021 and 2022, the effective tax rate differed from the statutory tax rates primarily due to the mix of domestic and foreign earnings amongst taxable jurisdictions, recorded valuation allowances to fully reserve against deferred tax assets in non-Israel jurisdictions and certain discrete items.
On March 11, 2021, the President of the United States signed the American Rescue Plan Act (the “ARPA”) into law as a continuing response to the COVID-19 pandemic. The ARPA implemented new entity taxation provisions as well as extended unemployment benefits and related incentives to provide further economic relief to US businesses. The passage of the ARPA did not have a material impact to the Company nor its calculated AETR for the year.
| 21 |
NOTE 17 - LEASES
The
Company has operating leases for office space and office equipment. The Company’s leases have remaining lease terms of
The Company has lease arrangements which are classified as short-term in nature. These leases meet the criteria for operating lease classification. Lease costs associated with the short-term leases are included in selling, general and administrative expenses on the Company’s condensed consolidated statements of operations during the three-months ended March 31, 2021 and 2022.
Components of lease expense are as follows:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
Three Months Ended March 31, |
||||||||
| 2021 | 2022 | |||||||
| Short term lease cost: | $ | $ | ||||||
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
SCHEDULE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITY OF OPERATING LEASES
| 2021 | 2022 | |||||||
Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Non-cash activity: | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | ||||||
Weighted-average remaining lease term and discount rate for our operating leases are as follows:
SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
| March 31, 2022 | ||||
| Weighted-average remaining lease term (in years) | ||||
| Weighted-average discount rate | % | |||
Scheduled maturities of operating lease liabilities outstanding as of March 31, 2022 are as follows:
SCHEDULED MATURITIES OF OPERATING LEASE LIABILITIES
| Year ending December 31: | ||||
| April - December 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| 22 |
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s cash and cash equivalents are carried at fair value. The carrying value of financing receivables approximates fair value due to the interest rate implicit in the instruments approximating current market rates. The carrying value of accounts receivables, accounts payable and accrued liabilities and short term bank debt approximates their fair values due to the short period to maturity of these instruments. The fair value of the Company’s long term debt is based on observable relevant market information and future cash flows discounted at current rates, which are Level 2 measurements.
SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
| March 31, 2022 | ||||||||
| Carrying Amount | Fair Value | |||||||
| Long term debt | $ | $ | ||||||
NOTE 19 - CONCENTRATION OF CUSTOMERS
For the three-month periods ended March 31, 2021 and 2022, there were no customers who generated revenues greater than 10% of the Company’s consolidated total revenues or generated greater than 10% of the Company’s consolidated accounts receivable.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Except for normal operating leases, the Company is not currently subject to any material commitments.
From time to time, the Company is involved in various litigation matters involving claims incidental to its business and acquisitions, including employment matters, acquisition related claims, patent infringement and contractual matters, among other issues. While the outcome of any such litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings, including the matters described below, either individually or in the aggregate, will not have a material adverse effect on its business, results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
In
August 2014, Pointer do Brasil Comercial Ltda. (“Pointer Brazil”) received a notification of lack of payment of VAT tax (Brazilian
ICMS tax) in the amount of $
In
July 2015, Pointer Brazil received a tax deficiency notice alleging that the services provided by Pointer Brazil should be classified
as “telecommunication services” and therefore Pointer Brazil should be subject to the state value-added tax. The aggregate
amount claimed to be owed under the notice was approximately $
NOTE 21 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments,” which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity’s ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This updated standard is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.
| 23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations of PowerFleet, Inc. and its subsidiaries (“PowerFleet”, “we”, “our” or “us”) should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and, accordingly, all amounts are approximations.
Cautionary Note Regarding Forward-Looking Statements
This report contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which may include information concerning the Company’s beliefs, plans, objectives, goals, expectations, strategies, anticipations, assumptions, estimates, intentions, future events, future revenues or performance, capital expenditures and other information that is not historical information. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may be beyond the Company’s control, and which may cause the Company’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “seek,” “estimate,” “expect,” “anticipate,” “project,” “plan,” “contemplate,” “plan,” “continue,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and beliefs, but there can be no assurance that the Company will realize its expectations or that its beliefs will prove to be correct.
There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements herein include, but are not limited, to: future economic and business conditions; the ability to recognize the anticipated benefit of the acquisition of Pointer Telocation Ltd. (“Pointer”); the loss of any of the Company’s key customers or reduction in the purchase of the Company’s products by any such customers; the failure of the markets for the Company’s products to continue to develop; the possibility that the Company may not be able to integrate successfully the business, operations and employees of I.D. Systems, Inc. (“I.D. Systems”) and Pointer; the Company’s inability to adequately protect its intellectual property; the Company’s inability to manage growth; the effects of competition from a wide variety of local, regional, national and other providers of wireless solutions; changes in laws and regulations or changes in generally accepted accounting policies, rules and practices; changes in technology or products, which may be more difficult or costly, or less effective, than anticipated; the effects of outbreaks of pandemics or contagious diseases, including the length and severity of the recent global outbreak of the novel coronavirus, COVID-19, and its impact on the Company’s business; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including the Company’s annual report on Form 10-K for the year ended December 31, 2021 and this quarterly report on Form 10-Q for the three months ended March 31, 2022.
There may be other factors of which the Company is currently unaware or which it currently deems immaterial that may cause its actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf apply only as of the date they are made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as may be required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events, or otherwise.
The Company makes available through its Internet website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports and other filings made by the Company with the SEC, as soon as practicable after the Company electronically files such reports and filings with the SEC. The Company’s website address is www.powerfleet.com. The information contained in the Company’s website is not incorporated by reference into this report.
Overview
PowerFleet, Inc. (together with its subsidiaries, “PowerFleet,” the “Company,” “we,” “our” or “us”) is a global leader of Internet-of-Things (“IoT”) solutions providing valuable business intelligence for managing high-value enterprise assets that improve operational efficiencies.
We are headquartered in Woodcliff Lake, New Jersey, with offices located around the globe.
Our patented technologies address the needs of organizations to monitor and analyze their assets to improve safety, increase efficiency and productivity, reduce costs, and improve profitability. Our offerings are sold under the global brands PowerFleet, Pointer and Cellocator.
We have an established history of IoT device development and innovation creating devices that can withstand harsh and rugged environments. With 54 patents and patent applications and 25 years’ experience, we believe we are well positioned to evolve our offerings for even greater value to customers through our cloud-based applications for unified operations.
We deliver advanced data solutions that connect mobile assets to increase visibility, operational efficiency and profitability. Across our spectrum of vertical markets, we differentiate ourselves by developing mobility platforms that collect data from unique sensors. Further, because we are original equipment manufacturer (“OEM”) agnostic, we help organizations view and manage their mixed assets homogeneously. All of our solutions are paired with software as a service (“SaaS”) and analytics platforms to provide an even deeper level of insights and understanding of how assets are utilized and how drivers and operators operate those assets. These insights include a full set of Key Performance Indicators (“KPI’s”) to drive operational and strategic decisions. Our customers typically get a return on their investment in less than 12 months from deployment.
Our enterprise software applications have machine learning capabilities and are built to integrate with our customers’ management systems to provide a single, integrated view of asset and operator activity across multiple locations while providing real-time enterprise-wide benchmarks and peer-industry comparisons. We look for analytics, as well as the data contained therein, to differentiate us from our competitors, adding significant value to customers’ business operations, and helping to contribute to their bottom line. Our solutions also feature open application programming interfaces (“API’s”) for additional integrations and development to boost other enterprise management systems and third-party applications.
We market and sell our connected IoT data solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as manufacturing, automotive manufacturing, wholesale and retail, food and grocery distribution, pharmaceutical and medical distribution, construction, mining, utilities, aerospace, vehicle rental, as well as logistics, shipping, transportation, and field services. Traditionally, these businesses have relied on manual, often paper-based, processes or on-premise legacy software to operate their high-value assets, manage workforce resources, and distributed sites; and face environmental, safety, and other regulatory requirements. In today’s landscape, it is crucial for these businesses to invest in solutions that enable easy analysis and sharing of real-time information.
| 24 |
Our Solutions
We provide critical actionable information that powers unified operations throughout organizations. We are solving the challenge of inefficient data collection, real-time visibility, and analysis that leads to transformative business operations. Our SaaS cloud-based applications take data from our IoT devices and ecosystem of third-party and partner applications to present actionable information for customers to increase efficiencies, improve safety and security, and increase their profitability in easy-to-understand reports, dashboards, and real-time alerts.
Key Applications of our IoT Solutions:
The Company provides real-time intelligence for organizations with high-value assets allowing them to make informed decisions and ultimately improve their operations, safety, and bottom line. Our applications enable organizations to capture IoT data from various types of assets with devices and sensors creating a holistic view for analysis and action.
The core applications our IoT solutions address include:
End-to-end Visibility: Organizations with expensive assets such as vehicles, machinery, or equipment need to keep track of where the assets are located, monitor for misuse, and understand how and when assets are being used. By having complete visibility of their assets, customers can improve security, utilization and customer service. In addition, our visibility solutions help with personnel workflows and resource management, freight visibility through load status, equipment availability status, dwell and idle time, geofencing, two-way temperature control and management, multizone temperature monitoring, arrival and departure times, and supply chain allocation.
Regulatory Compliance: Businesses must comply with government regulations and provide proof of compliance, which is commonly an onerous process to enforce and maintain. Our solutions provide critical data points and reports to help customers stay within compliance, avoid fines for non-compliance, and automate the reporting process. We deliver real-time position reports, hours-of-service, temperature monitoring and control, electronic safety checklists, workflow management, controlling vehicle access to only authorized operators, inspection reports, and history logs of use.
Improve Safety: Our applications are designed to provide asset and operator management, monitoring, and visibility for safer environments. Our solutions allow our customers to monitor their fleet of vehicles on various parameters, including but not limited to, vehicle location, speed, engine fault codes, driver behavior, eco-driving, and ancillary sensors and can receive reports and alerts, either automatically or upon request wirelessly via the internet, email, mobile phone or an SMS. In addition, our dash camera provides critical video capture that can be used to help exonerate drivers when in accidents or help bolster training and coaching programs of employees. We also offers preventative solutions such as safety warning products to alert vehicle operators of objects or pedestrians in their pathway to prevent accidents, injuries, and damage. Our analytics platform features dashboards with KPIs and can help manager identify patterns, trends and outliers that can be used as flags for interventions.
Drive Operational Efficiency & Productivity: To increase utilization of mobile assets, our solutions enable the identification of a change in status, real-time location, geo-fencing alerts when an asset is approaching or leaving its destination, cargo status, and on-board intelligence utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive. Having this information enables customers to increase capacity, speed of service, right-size their fleets, and improve communication internally and with customers. In addition, customers can reduce revenue per mile, reduce claims and claims processing times, and reduce the number of assets needed. This is achieved through proving such things as two-way integrated workflows for drivers, control assignments and work change, Electronic Driver Logging (“ELD”) and automated record keeping for regulatory compliance, monitoring of asset pools and geofence violations, and various reporting insights that flag under-utilized assets, the closest assets, and alerts on dwell time and exceeding the allotted time for loading and unloading.
We help customers to automate processes and increase productivity of their employees. Our applications enable customers to determine where operators are assigned and can temporarily reassign them based on peak needs, evaluate any disparity in the amount employees are paid compared to the time they actually spend operating a vehicle. Our applications help answer the question of why does it take some employees longer than others to do specific tasks, where to focus labor resources, and how to forecast vehicles and operators needed for future workflow.
In addition, for our rental car vertical, our applications automatically upload vehicle identification number, mileage and fuel data as a vehicle enters and exits the rental lot, which can significantly expedite the rental and return processes for travelers, and provide the rental company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and an opportunity to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and helping customers with luggage.
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Our solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles wherever they are parked. Whether for traditional “pod-based” rental or for the emerging rent-anywhere model, the system, through APIs integrated into any rental company’s fleet management system, (i) manages member reservations by smart phone or Internet, and (ii) charges members for vehicle use by the hour.
For our customers with a variety of make-model-years in their fleet, we have developed an unmatched library of certified vehicle code interfaces through our second-generation On-Board Diagnostics (“OBD-II”), industry standard. Our patented fleet management system helps fleet owners improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support.
Increase Security: Our solutions allow our customers to reduce theft and improve inventory management. Customers can lockdown their assets with automated e-mail or text message alerts, emergency tracking of assets (higher frequency of reports) if theft is expected, geo-fencing alerts when an asset enters a prohibited geography or location, and near real-time sensors that alert based on changes in temperature and shock, among other things. We also provide stolen vehicle retrieval (“SVR”) services. Most of the SVR products used to provide our SVR services are mainly sold to (i) local car dealers and importers that in turn sell the products equipped in the vehicle to the end users who purchase the SVR services directly from us, or (ii) leasing companies which purchase our SVR services in order to secure their own vehicles.
Reduce Costs
We enable our customers to improve asset utilization, reduce capital costs, and cut operating expenses, such as vehicle maintenance or service and support. Our solutions provide engine performance, machine diagnostics, fuel consumption, and battery life to improve preventative maintenance scheduling, increase uptime, and gain a longer service life of equipment. Through our software applications, customers can optimize capacity, analyze resource allocation, and improve utilization of assets to reduce capital expenses such as purchasing new or leasing additional equipment. Our applications provide root cause analysis for any cargo claims and helps with exoneration of drivers in accidents via dash camera visibility.
Analytics and Machine Learning
Our analytics platforms provide our customers with a holistic view of their asset activity across their enterprise. For example, our image machine learning system allows us to process images from our freight camera and other sources and identify key aspects of operations and geospatial information such as location, work being accomplished, type of cargo, how cargo is loaded and if there are any visible issues such as damage.
Key Performance Indicators & Benchmarks
Our cloud-based software applications provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. In addition, our customers can set real-time alerts for exception-based reporting or critical activity that needs immediate attention. This enables management teams to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety.
Specifically, our analytics platforms allow users to quantify best-practice enterprise benchmarks for asset utilization and safety, reveal variations and inefficiencies in asset activity across both sites and geographic regions, or identify opportunities to eliminate or reallocate assets, to reduce capital and operating costs. We provide an extensive set of decision-making tools and a variety of standard and customized reports to help businesses improve overall operations.
We look for analytics and machine learning to make a growing contribution to drive platform and SaaS revenue, further differentiate our offerings and add value to our solutions. We also use our analytics platform for our own internal platform quality control.
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Services
Hosting Services. We provide the use of our systems as a remotely hosted service, with the system server and application software residing in our colocation center or on a cloud platform provider’s infrastructure (e.g., Azure, AWS). This approach helps us reduce support costs and improve quality control. It separates the system from the restrictions of the customers’ local IT networks, which helps reduce their system support efforts and makes it easier for them to receive the benefits of system enhancements and upgrades. Our hosting services are typically offered with extended maintenance and support services over a multi-year term of service, with automatic renewals following the end of the initial term.
Software as a Service. We provide system monitoring, help desk technical support, escalation procedure development, routine diagnostic data analysis and software updates services as part of the ongoing contract term. These services ensure deployed systems remain in optimal performance condition throughout the contract term and provide access to newly developed features and functions on an annual basis.
Maintenance Services. We provide a warranty on the hardware components of our system. During the warranty period, we either replace or repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and support on a time and materials basis.
Customer Support and Consulting Services for Ease of Use, Adoption, and Added Value. We have developed a framework for the various phases of system training and support that offer our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting, software installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software user training, system administrator training, information technology issue training, ad hoc training during system launch and advanced software user training.
Increasingly, training services are provided through scalable online interactive training tools. Support and consulting services are priced based on the extent of training that the customer requests. To help our customers derive the most benefit from our system, we supply a broad range of documentation and support including videos, interactive online tools, hardware user guides, software manuals, vehicle installation overviews, troubleshooting guides, and issue escalation procedures.
We provide our consulting services both as a stand-alone service to study the potential benefits of implementing an IoT business intelligence solution and as part of the system implementation itself. In some instances, customers prepay us for extended maintenance, support and consulting services. In those instances, the payment amount is recorded as deferred revenue and revenue is recognized over the service period.
Recent Developments
The ongoing COVID-19 pandemic and its related impact on the global supply chain, inflation, and the conflict between Russia and Ukraine have resulted in significant economic disruption and continue to adversely impact the broader global economy, including certain of our customers and suppliers. Given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19, the supply chain disruptions, inflation or the conflict between Russia and Ukraine on our financial condition, results of operations or cash flows into the foreseeable future. The ultimate extent of the effects of the COVID-19 pandemic, supply chain disruptions, inflation and the conflict between Russia and Ukraine on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic subsides.
Risks to Our Business
We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions, and there can be no assurance that our solutions will be deployed on a wider scale by the customer.
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The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenue and results of operations to vary significantly and unexpectedly from quarter to quarter. These variations could materially and adversely affect the market price of our common stock.
Our ability to increase our revenues and generate net income will depend on a number of factors, including, for example, our ability to:
| ● | increase sales of products and services to our existing customers; |
| ● | convert our initial programs into larger or enterprise-wide purchases by our customers; |
| ● | increase market acceptance and penetration of our products; and |
| ● | develop and commercialize new products and technologies. |
As of March 31, 2022, we had cash (including restricted cash) and cash equivalents of $20.9 million and working capital of $40.5 million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.
We believe that our available working capital, anticipated level of future revenues, expected cash flows from operations and available borrowings under its revolving credit facility with Bank Hapoalim B.M. will provide sufficient funds to cover capital requirements through May 10, 2023.
Additional risks and uncertainties to which we are subject are described under the heading “Risk Factors” in Part II, Item 1A of this report and in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Policies
For the three-month period ended March 31, 2022, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Results of Operations
The following table sets forth, for the periods indicated, certain operating information expressed as a percentage of revenue:
| Three Months Ended March 31, | ||||||||
| 2021 | 2022 | |||||||
| Revenue: | ||||||||
| Products | 39.4 | % | 43.4 | % | ||||
| Services | 60.6 | % | 56.6 | % | ||||
| 100.0 | % | 100.0 | % | |||||
| Cost of Revenue: | ||||||||
| Cost of products | 28.1 | % | 36.1 | % | ||||
| Cost of services | 22.0 | % | 20.5 | % | ||||
| 50.1 | % | 56.6 | % | |||||
| Gross profit | 49.9 | % | 43.4 | % | ||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | 46.9 | % | 45.0 | % | ||||
| Research and development expenses | 9.5 | % | 9.7 | % | ||||
| Total operating expenses | 56.4 | % | 54.7 | % | ||||
| Loss from operations | -6.5 | % | -11.3 | % | ||||
| Interest income | 0.0 | % | 0.0 | % | ||||
| Interest expense | 1.9 | % | 0.3 | % | ||||
| Other income (expenses) net, | 0.0 | % | 0.0 | % | ||||
| Net loss before income taxes | -4.6 | % | -11.0 | % | ||||
| Income tax benefit (expense) | -1.6 | % | 2.1 | % | ||||
| Net loss before non-controlling interest | -6.2 | % | -8.9 | % | ||||
| Non-controlling interest | 0.0 | % | 0.0 | % | ||||
| Net loss | -6.2 | % | -8.9 | % | ||||
| Accretion of preferred stock | -0.6 | % | -0.5 | % | ||||
| Preferred stock dividend | -3.5 | % | -3.1 | % | ||||
| Net loss attributable to common shareholders | -10.3 | % | -12.5 | % | ||||
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Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
REVENUES. Revenues increased by approximately $4.2 million, or 14.3%, to $33.2 million in the three months ended March 31, 2022, from $29.0 million in the same period in 2021.
Revenues from products increased approximately $3.0 million, or 26%, to 14.4 million in the three months ended March 31, 2022, from $11.4 million in the same period in 2021. The increase in product revenue is due to increased product sales in our PowerFleet for Logistics business.
Revenues from services increased approximately $1.2 million, or 6.8%, to $18.8 million in the three months ended March 31, 2022, from $17.6 million in the same period in 2021. The increase in services revenue is principally due to an increase in our install base that generates service revenue.
COST OF REVENUES. Cost of revenues increased by approximately $4.3 million, or 29.2%, to $18.8 million in the three months ended March 31, 2022, from $14.5 million for the same period in 2021. Gross profit was $14.4 million in three months ended March 31, 2022, compared to $14.5 million for the same period in 2021. As a percentage of revenues, gross profit decreased to 43.4% in 2022 from 49.9% in 2021. The decrease in gross profit as a percentage of revenue was principally due to the increase in raw materials costs related to the global supply chain issues.
Cost of products increased by approximately $3.8 million, or 46.9%, to $12.0 million in the three months ended March 31, 2022, from $8.2 million in the same period in 2021. Gross profit for products was $2.4 million in the three months ended March 31, 2022, compared to $3.2 million in the same period in 2021. As a percentage of product revenues, gross profit decreased to 16.8% in 2022 from 28.6% in 2021. The decrease in gross profit as a percentage of revenue was impacted by product mix, higher costs associated with supply chain issues and electronic component shortages and inflation.
Cost of services increased by approximately $0.4 million, or 6.5%, to $6.8 million in the three months ended March 31, 2022, from $6.4 million in the same period in 2021. Gross profit for services was $12.0 million in the three months ended March 31, 2022, compared to $11.2 million in the same period in 2021. As a percentage of service revenues, gross profit increased to 63.9% in 2022 from 63.8% in 2021.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative (“SG&A”) expenses increased by approximately $1.3 million, or 9.6%, to approximately $14.9 million in the three months ended March 31, 2022, compared to $13.6 million in the same period in 2021, principally due to increased salaries and increased professional services fees. As a percentage of revenues, SG&A expenses decreased to 45.0% in the three months ended March 31, 2022, from 46.9% in the same period in 2021.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development (“R&D”) expenses increased by approximately $0.4 million, or 17.7%, to approximately $3.2 million in the three months ended March 31, 2022, compared to $2.8 million in the same period in 2021, principally due to the product development expenses. As a percentage of revenues, R&D expenses increased to 9.7% in the three months ended March 31, 2022, from 9.5% in the same period in 2021, primarily due to the increase in revenue from 2022 to 2021.
NET LOSS ATTIBUTABLE TO COMMON STOCKHOLDERS. Net loss was $4.1 million, or $(0.12) per basic and diluted share, for the three months ended March 31, 2022, as compared to net loss of $3.0 million, or $(0.09) per basic and diluted share, for the same period in 2021. The decrease in the net loss was due primarily to the reasons described above.
Liquidity and Capital Resources
Historically, our capital requirements have been funded primarily from the net proceeds from the issuance of our securities, including any issuances of our common stock upon the exercise of options. As of March 31, 2022, we had cash (including restricted cash) and cash equivalents of $20.9 million and working capital of $40.5 million.
On October 3, 2019, in connection with our acquisition of Pointer, we issued and sold 50,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P and ABRY Investment Partnership, L.P. (the “Investors”), pursuant to the terms of an Investment and Transaction Agreement, dated as of March 13, 2019 (as such agreement has been amended from time to time, the “Investment Agreement”) for an aggregate purchase price of $50.0 million. The proceeds received from such sale were used to finance a portion of the cash consideration payable in our acquisition of Pointer.
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In addition, our wholly-owned subsidiaries, PowerFleet Israel and Pointer (the “Borrowers”) are party to a Credit Agreement (the “Credit Agreement”) with Bank Hapoalim B.M. (“Hapoalim”), pursuant to which Hapoalim agreed to provide PowerFleet Israel with two senior secured term loan facilities in an aggregate principal amount of $30 million (comprised of two facilities in the aggregate principal amount of $20 million (the “Term A Facility”) and $10 million (the “Term B Facility”)) and a five-year revolving credit facility to Pointer in an aggregate principal amount of $10 million (the “Revolving Facility”). The outstanding amount under the term loan facilities was $22.4 million as of March 31, 2022. The proceeds of the term loan facilities were used to finance a portion of the cash consideration payable in our acquisition of Pointer. The proceeds of the revolving credit facility may be used by Pointer for general corporate purposes.
On August 23, 2021, the Borrowers entered into an amendment (the “Amendment”), effective as of August 1, 2021, to the Credit Agreement with Hapoalim. The Amendment memorializes the agreements between the Borrowers and Hapoalim regarding a reduction in the interest rates of the Term A Facility and the Term B Facility. Pursuant to the Amendment, commencing as of November 12, 2020, the interest rate with respect to the Term A Facility was reduced to a fixed rate of 3.65% per annum and the interest rate with respect to the Term B Facility was reduced to a fixed rate of 4.5% per annum. The Amendment also provides, among other things, for (i) a reduction in the credit allocation fee on undrawn and uncancelled amounts of the Revolving Facility from 1% to 0.5% per annum, (ii) removal of the requirement that PowerFleet Israel maintain $3,000 on deposit in a separate reserve fund, and (iii) modifications to certain of the affirmative and negative covenants, including a financial covenant regarding the ratio of the Borrowers’ debt levels to Pointer’s EBITDA.
We have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on November 27, 2019. Pursuant to the shelf registration statement, we may offer to the public from time to time, in one or more offerings, up to $60.0 million of our common stock, preferred stock, warrants, debt securities, and units, or any combination of the foregoing, at prices and on terms to be determined at the time of any such offering. The specific terms of any future offering will be determined at the time of the offering and described in a prospectus supplement that will be filed with the SEC in connection with such offering.
On February 1, 2021, we closed an underwritten public offering (the “Underwritten Public Offering”) of 4,427,500 shares of common stock (which includes the full exercise of the underwriters’ over-allotment option) for gross proceeds of approximately $28.8 million, before deducting the underwriting discounts and commissions and other offering expenses. The offer and sale of common stock in the Underwritten Public Offering were made pursuant to our shelf registration statement.
As a result of the ongoing COVID-19 pandemic and its related impact on the global supply chain, inflation, and the conflict between Russia and Ukraine, there remains uncertainty surrounding the potential impact of such events on our results of operations and cash flows. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures and borrowing under the revolving credit facility.
Capital Requirements
As of March 31, 2022, we had cash (including restricted cash) and cash equivalents of $20.9 million and working capital of $40.5 million. Our primary sources of cash are cash flows from operating activities, our holdings of cash, cash equivalents and investments from the sale of our capital stock and borrowings under our credit facility. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.
We believe our available working capital, anticipated level of future revenues and expected cash flows from operations will provide sufficient funds to cover capital requirements through at least May 10, 2023.
Our capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.
Operating Activities
Net cash used in operating activities was $2.1 million for the three months ended March 31, 2022, compared to net cash provided by operating activities of $0.8 million for the same period in 2021. The net cash used in operating activities for the three months ended March 31, 2022, reflects a net loss of $2.9 million and includes non-cash charges of $0.5 million for stock-based compensation, $2.1 million for depreciation and amortization expense and $0.7 million for right of use asset amortization. Changes in working capital items included:
| ● | an increase in inventory of $1.9 million; | |
| ● | an increase in prepaid expenses and other assets of 1.3 million; and | |
| ● | an increase in accounts payable of $0.8 million. |
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Investing Activities
Net cash used in investing activities was $0.6 million for the three months ended March 31, 2022, compared to net cash used in investing activities of $0.6 million for the same period in 2021. The cash used in investing activities for the three months ended March 31, 2022, was for the purchase of fixed assets. The cash used in investing activities in the same period in 2021 was primarily for the purchase of fixed assets.
Financing Activities
Net cash used in financing activities was $1.6 million for the three months ended March 31, 2022, compared to net cash provided by financing activities of $24.3 million for the same period in 2021. The cash used in financing activities for the three months ended March 31, 2022, was primarily due to the repayment of long-term debt of $1.5 million. The change from the same period in 2021 was primarily due to the net proceeds from our stock offering of $26.8 million which was offset by the repayment of long-term debt of $1.3 million and the payment of preferred stock dividends of $1.0 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
As of March 31, 2022, there have been no material charges in contractual obligations as disclosed under the caption “Contractual Obligations and Commitments” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Inflation
Rising inflation and other macroeconomic conditions in the U.S. have resulted in higher costs of raw materials, freight, and labor, which has impacted our operating costs. In addition, we operate in several emerging market economies that are particularly vulnerable to the impact of inflationary pressures that could materially and adversely impact our operations in the foreseeable future.
Impact of Recently Issued Accounting Pronouncements
The Company is subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, see Note 21 to our consolidated financial statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
a. Disclosure controls and procedures.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2021, of our internal control over financial reporting based on the framework in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, the Chief Executive Officer and the Chief Financial Officer concluded that our internal control over financial reporting was not effective as of December 31, 2021, as disclosed under the caption “Management’s Report on Internal Control over Financial Report” in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, due to a material weakness in our internal control over financial reporting described below, which have not been remediated as of March 31, 2022.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has concluded that a material weakness existed as of December 31, 2021, with respect to its Israel component:
| ● | Controls were not designed, documented, and maintained to ensure accurate reporting of results in Israel including (i) insufficient design and operating effectiveness of management review controls including the appropriate level of precision required to mitigate the potential for a material misstatement, (ii) insufficient documentation evidencing management’s review to support the financial statement close process and (iii) inadequate verification for completeness and accuracy of key reports. |
The material weakness did not result in any restatements of consolidated financial statements previously reported by us, there were no changes in previously released financial results and management concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States.
We will take certain steps to remediate the material weakness described above and otherwise improve the overall design and operation of our control environment. These steps include:
| ● | Utilizing external resources to support our efforts to rework certain control gaps across the various processes in Israel with identified deficiencies; | |
| ● | Implementing enhanced documentation associated with management review controls and validation of the completeness and accuracy of key reports in Israel; and | |
| ● | Training of relevant personnel reinforcing existing policies and enhanced policies with regards to the appropriate steps and procedures required to be performed related to the execution and documentation of internal controls. |
b. Changes in internal control over financial reporting.
There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is at times subject to various legal proceedings. For a description of our material pending legal proceedings, see Note 20 to our consolidated financial statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth under the heading “Risks to Our Business” in Part I, Item 2 of this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as such factors could materially affect the Company’s business, financial condition, and future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition, or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table provides information regarding our shares withheld activity for each month of the quarterly period ended March 31, 2022 (in thousands). These shares were withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| January 1, 2022 - January 31, 2022 | 21,000 | (1) | $ | 4.75 | $ | - | $ | - | ||||||||
| February 1, 2022 - February 28, 2022 | 23,000 | (1) | $ | 3.66 | $ | - | $ | - | ||||||||
| March 1, 2022 - March 31, 2022 | - | $ | - | $ | - | $ | - | |||||||||
| Total | 44,000 | $ | 4.17 | $ | - | $ | - | |||||||||
| (1) | Represents shares of common stock withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock. |
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Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibits:
Exhibit Number |
Description | |
| 10.1 | Employment Offer Letter, dated January 5, 2022, between PowerFleet, Inc. and Steve Towe (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of PowerFleet, Inc., filed with the SEC on January 5, 2022).+ | |
| 10.2 | Severance Agreement, dated January 5, 2022, between PowerFleet, Inc. and Steve Towe (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of PowerFleet, Inc., filed with the SEC on January 5, 2022).+ | |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 32 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. §1305 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | |
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2022; (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2022; (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity for the periods January 1, 2021 through March 31, 2021 and January 1, 2022 through March 31, 2022; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2022; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements. | |
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL (included as Exhibit 101). |
* Furnished herewith.
+ Management contract or compensatory plan or arrangement.
| 34 |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| POWERFLEET, INC. | ||
| Date: May 10, 2022 | By: | /s/ Steve Towe |
| Steve Towe | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 10, 2022 | By: | /s/ Ned Mavrommatis |
| Ned Mavrommatis | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| 35 |
Exhibit 31.1
CERTIFICATION
I, Steve Towe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PowerFleet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 10, 2022 | /s/ Steve Towe |
| Steve Towe | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Ned Mavrommatis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PowerFleet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 10, 2022 | /s/ Ned Mavrommatis |
| Ned Mavrommatis | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Steve Towe, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of PowerFleet, Inc. for the quarter ended March 31, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of PowerFleet, Inc. at the dates and for the periods indicated.
I, Ned Mavrommatis, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of PowerFleet, Inc. for the quarter ended March 31, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of PowerFleet, Inc. at the dates and for the periods indicated.
| By: | /s/ Steve Towe | |
| Steve Towe | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 10, 2022 | ||
| By: | /s/ Ned Mavrommatis | |
| Ned Mavrommatis | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: May 10, 2022 |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Quarterly Report on Form 10-Q of PowerFleet, Inc. for the quarter ended March 31, 2022 or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PowerFleet, Inc. and will be retained by PowerFleet, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.